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Impact of Australia’s Free Trade Agreements with
China, Japan and Korea: The Case of Wine
Kym Anderson and Glyn Wittwer
December 2015
© Kym Anderson and Glyn Wittwer
Wine Economics Research Centre
Working Papers
Working Paper No. 0415 ISSN 1837-9397
www.adelaide.edu.au/wine-econ
WINE ECONOMICS RESEARCH CENTRE The Wine Economics Research Centre was established in 2010 by the School of Economics and the Wine 2030 Research Network of the University of Adelaide, having been previously a program in the University's Centre for International Economic Studies. The Centre’s purpose is to promote and foster its growing research strength in the area of wine economics research, and to complement the University's long-established strength in viticulture and oenology. The key objectives for the Wine Economics Research Centre are to:
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Contact details: Wine Economics Research Centre School of Economics University of Adelaide SA 5005 AUSTRALIA Email: [email protected] Centre publications can be downloaded at: 30Twww.adelaide.edu.au/wine-econ/30 T
The University of Adelaide
Impact of Australia’s Free Trade Agreements with China, Japan and Korea: The case of wine
Kym Anderson
Wine Economics Research Centre School of Economics
University of Adelaide Adelaide, SA 5005
and
Glyn Wittwer
Centre of Policy Studies Victoria University,
Melbourne, Vic, 3000 [email protected]
December 2015
Impact of Australia’s Free Trade Agreements with China, Japan and Korea: The case of wine
Introduction
The signing of the Australia-China Free Trade Agreement (ChAFTA) in mid-2015, following
Australia’s signing in late 2014 of FTAs with Japan and Korea, offer the prospect of Australia
reversing the impact of the earlier signing by Chile and New Zealand of their FTAs with China
(and by Chile of FTAs also with Japan and Korea). Trade diversion resulted from those earlier
FTAs signed by agricultural-exporting countries whose producers are close competitors to
Australia’s farmers and agribusinesses in East Asian markets. As a result, Australia’s share of
imports into China rose less rapidly because of preferential access provided to Chile and New
Zealand. Had Australia not negotiated the ChAFTA, its share of China’s imports would have
continued to grow less rapidly as the Chile and New Zealand FTAs with China continued to be
phased in over the next few years.
For South Australia, one of the most important agricultural products that was being
subjected to trade diversion is wine, since the vast majority of Australia’s wine exports are from
South Australian-based wineries. This paper therefore provides, as a case study, an analysis of
that product’s trade between Australia and China as it would have been to 2018 (a) without any
of the above-mentioned FTAs, (b) with just Chile and New Zealand FTAs, and (c) with
Australia’s three recent FTAs as well. It makes sense to consider Australia’s bilateral FTAs with
Japan and Korea alongside its FTA with Japan because they will be implemented simultaneously
– although, as we will see in the case of wine, China is by far the most-important East Asian
market for Australia.
2
Rice wine is common in Asia, but wine made from grapes has had a very minor role
traditionally. Prior to this century grape wine was consumed only by Asia’s elite, and produced
only in tiny quantities and mostly in just Japan and – from the late 1980s – China.P0F
1P However,
income growth and a preference swing towards this traditional European product have changed
the consumption situation dramatically. China is also expanding its area of vineyards and is now
the world’s 6P
thP largest producer of grape-based wine (hereafter called just wine), up from 14P
thP as
recently as 2001.P1F
2P To date that supply expansion has not been able to keep up with China’s
growth in demand though, so wine imports have surged. Nor are those imports only of low
quality. The average current US$ price of Asia’s wine imports grew at 7% per year between 2000
and 2009, compared with only 5.5% in the rest of the world. By 2009 Asia’s average import price
was nearly 80% higher than the world average (and more than four times higher in the case of
Hong Kong and Singapore). Even the unit values of China’s imports of both still bottled and
sparkling wines were above the global average by 2009 (Anderson and Nelgen 2011).
Meanwhile, shortly after removing its tariff on wine imports in February 2008, Hong Kong
became the world’s most important market for ultra-premium and iconic wines.
What is the future of Asia and especially China in the world’s wine markets? What roles
will preferential trade agreements play? And how much will China’s austerity/anti-corruption
drive, introduced rapidly through 2013, dampen conspicuous consumption of luxuries such as
expensive wines? This paper addresses each of these questions, drawing on a recent paper by
Anderson and Wittwer (2015). It first draws on comparative advantage theory, then looks at the
recent history in more detail before presenting some projections for 2018 under various
assumptions about economic growth, real exchange rates, bilateral trade agreements, and China’s
austerity measures. It concludes that is set to continue to change global markets for wines
dramatically, and that Australia – especially South Australia – is going to be better placed to
capture a greater share of China’s wine import market as a consequence of ChAFTA.
1 Winegrape production in China may have begun more than two millennia ago, but it would have been only for the ruling elite’s pleasure (Huang 2000 (pp. 240-246); McGovern 2003, 2009). For developments in East Asian wine markets to the turn of this century, see Findlay et al. (2004). 2 China is also the world’s largest producer of table grapes. Its total vineyard area surpassed that of France in 2014, at 799,000 hectares compared with France’s 792,000, and so is now 2nd only to Spain’s 1.02 million hectares (OIV 2015).
3
Determinants of comparative advantage in wine
According to the workhorse theory of comparative advantage developed in the 20P
thP century, we
should expect agricultural trade to occur between relatively lightly populated economies that are
well-endowed with agricultural land and those that are densely populated with little agricultural
land per worker (Krueger 1977). Leamer (1987) developed this model further and related it to
paths of economic development. If the stock of natural resources is unchanged, rapid growth by
one or more countries relative to others in their availability of produced capital (physical plus
human skills and technological knowledge) per unit of available labour time would tend to cause
those economies to strengthen their comparative advantage in non-primary products. By contrast,
a discovery of minerals or energy raw materials would strengthen that country’s comparative
advantage in mining and weaken its comparative advantage in agricultural and other tradable
products, other things equal. It would also boost national income and hence the demand for
nontradables, which would cause mobile resources to move into the production of nontradable
goods and services, further reducing farm and industrial production (Corden 1984; Garnaut 2014;
Freebairn 2015). As port etc. infrastructure is develops and costs of trading internationally fall for
the country, more products move from the nontradable to the tradable category (Venables 2004).
At early stages of development of a country with a relatively small stock of natural
resources per worker, wages would be low and the country is likely to have an initial comparative
cost advantage in unskilled labour-intensive, standard-technology manufactures. Then as the
stock of industrial capital grows, there would be a gradual move toward exporting manufactures
that are relatively intensive in their use of physical capital, skills and knowledge. Natural
resource-abundant economies, however, may invest more in capital specific to primary
production and so would not develop a comparative advantage in manufacturing until a later
stage of development, at which time their industrial exports would be relatively capital intensive.
The above theory of changing comparative has been used successfully to explain Asia’s
resource-poor first- and second-generation industrializing economies becoming more dependent
4
on imports of primary products from their resource-rich trading partners (see, e.g., Anderson and
Smith 1981). But how helpful is that theory for explaining comparative advantage in wine?
Grape-based wine is dependent on winegrapes as an input, and they are too perishable to
be transported internationally without at least the first stages of processing. The lowest-quality
winegrapes and wine can be produced in less-than-ideal regions and sold as an undifferentiated
commodity without a great deal of knowhow, but only at prices barely above the cost of
production for most grapegrowers. To produce a higher-quality product that can be differentiated
from other wines by consumers, and thus attract a higher price, requires far more technological
knowledge and skills in grape growing, wine making and wine marketing in addition to access to
high-quality vineyard land or at least grapes therefrom. To be economically sustainable the
producer also needs ready access to financial capital to cover the very considerable up-front
establishment costs and to finance the years when receipts fall short of outgoings, including the
first seven years before cash income begins to exceed cash outlays. Secure property rights over
the vineyard land are essential as well, since the lifetime of vines can be 30+ years.
Three determinants of particular importance to a country’s competiveness in producing
wine rather than other farm products are terroir, traditions, and technologies.
Terroir refers to various pertinent aspects of climate, topography, soils, geology, etc. that
determine the quality of the vine’s growing conditions. Vineyard site selection therefore is
crucial. Experience has determined the best sites and most-suitable grape varieties in long-
established regions, whereas in new regions science has to be used to speed the process of
approaching the potential of any region to produce quality winegrapes. The conventional wisdom
is that winegrapes grow best between the 30P
oP and 50P
oP temperate latitude bands north and south of
the equator, and where rain is concentrated in the winter and summer harvest times are dry.
Lower latitudes typically result in lower-quality winegrapes. However, simultaneously moving to
higher altitudes can help, because temperatures decline about 5P
oP centigrade per 1000 metres of
elevation (Gladstones 1992; Ashenfelter and Storchmann 2014).
Traditions determine not only how a product is produced but also the extent of local
consumer demand. This is important for wine because typically local demand is the easiest and
least costly for producers to satisfy, as there are relatively high fixed costs of entry into new
export markets. Stigler and Becker (1977) argue that economists should begin by assuming tastes
5
are stable over time and similar among people, and then focus on explaining differences in
consumption patterns using standard determinants such as relative prices and real incomes. Social
norms and religion can also influence interest in consumption of alcoholic beverages, and those
can alter with economic integration/globalization (Aizenman and Brooks 2008).
As for technologies, there is always potential to improve the efficiency of traditional
production, processing, entrepreneurship and marketing, be that by trial and error of practitioners
over the generations or via formal investment in private and public research and development
(R&D). The New World wine-producing countries have been more dependent on newly
developed technologies and less on terroir than have producers in Western Europe, although both
sets of countries have made major R&D investments – and expanded complementary tertiary
education in viticulture, oenology and wine marketing – over the past half-century (Giuliana,
Morrison and Rabellotti 2011). Those technologies potentially are transferrable to other
countries, a process that has been greatly accelerated over the past two decades through two
mechanisms. One is the emergence of fly-in, fly-out viticulturalists and winemakers from both
Old World and New World wine-producing countries (Williams 1995). The other mechanism is
via foreign direct investment joint ventures: by combining two firms’ technical and market
knowledge, the latest technologies can be diffused to new regions more rapidly.
New technologies in agriculture have long tended to be biased in favour of saving the
scarcest factor of production, as reflected in relative factor prices. Hayami and Ruttan (1985)
emphasize that the focus of R&D investments has been driven in part by changes in factor prices,
and in particular by the rise in real wages. That has resulted in the development and/or adoption
of labour-saving technologies such as mechanical harvesters and pruners for vineyards and super-
fast (even robotic) bottling/labelling equipment for wineries in viticultural land-abundant, labour-
scarce countries. The adoption of labour-saving technologies has helped countries with rapidly
rising real wages retain their comparative advantage in what traditionally had been (at least at the
primary stage of grape growing) a labour-intensive industry. This in turn means poorer countries
need to find sources of comparative advantage other than just low wages.
Relative factor endowments affect the comparative advantage of a country in terms also
of the quality of its exported products. New trade theory suggests richer, capital-abundant
6
countries will export higher-quality and hence higher-priced goods (Fajgelbaum, Grossman and
Helpman 2011).
A further set of influences on comparative advantage that can be important at certain
times relates to currency exchange rate movements. A macroeconomic shock such as Argentina’s
devaluation against the US dollar by two-thirds in late 2001, or a doubling in the Australian-US
dollar exchange rate over the subsequent decade due largely to Australia’s mining boom, have
had major (and opposite) impacts on the international competiveness of wineries in those two
Southern Hemisphere countries (Anderson and Wittwer 2013).
Asia’s wine production, consumption and trade to date
The previous section provides plenty of reasons for not expecting much winegrape production in
most Asian countries. There is almost no tradition of wine consumption domestically, most
people’s incomes until very recently have been too low for wine to be a priority, there are very
few regions with suitable terroir especially where it is not hot and/or humid, and in numerous
Islamic Asian countries their religion frowns on alcohol. It is thus not surprising that the only
Asian countries with a significant area of grapevines (of which only a small fraction is used in
wine making) are parts of Japan, Korea and China. About 1% of South Korea’s small crop area
has been devoted to vines over the past two decades, and just 0.4% of Japan’s since the 1970s,
with little change in either country over those periods. By contrast, the share of crop area under
vines in China has been growing rapidly, more than doubling since the turn of the century. Even
so, that share in China is still not quite as high as in Japan, which suggests there is scope for
substantially more expansion without encroaching very much on land used for food production
(bearing in mind also that quality winegrapes grow better on poor slopes than on fertile flat
land).P2F
3P China has been open to foreign direct investment in vineyards and wineries, and has
welcomed flying vignerons as consultants. It even seems to have found ways to provide adequate
3 Australia also had only 0.4% of its crop area under vines in 2008. By contrast, shares that year are as high as 4% in France, 6% in Spain and New Zealand, 8% in Italy and 14% in Portugal (Anderson and Nelgen 2011, Table 6). It should be noted that the quality of grape and wine data for China are lower than for the other countries mentioned in this paper, but they are the best the author has been able to assemble.
7
property rights for investors, notwithstanding the fact that farm land cannot be privately owned in
China. Its vineyards are heavily focusing on red varieties (considered by Chinese people to be
best for their health), especially ones originating in France.P3F
4P
China’s volume of wine production has been growing more than twice as fast as its area
under vines. This has been possible not just because the share of domestically grown grapes
destined for wine has risen but also because China imports a lot of wine in bulk and blends it
with wine made from Chinese grapes. This is legally feasible because national labeling laws are
such that a bottle marked ‘Product of China’ is required to have only 10% local content.
Turning to consumption, there are only five Asian countries plus Hong Kong and Taiwan
where per capita grape-based wine consumption has yet to exceed 0.2 litres per year. In each of
those countries the level in 2012 was well above that of 2000, but the most dramatic increase has
been in China (Figure 1(a)). Since China is also the most populous country, its growth has
overwhelmingly dominated Asia’s overall increase in wine consumption, which has increased
more than six-fold since 2000 (Figure 1(b)). China accounted for barely half of Asia’s wine
consumption in 2000, but now it accounts for all but one-fifth. Populous India, by contrast, has a
wine industry that is less than one-fiftieth the size of China’s, notwithstanding its double-digit
growth during the past decade.
During the first decade of this century wine doubled its share of Asia’s recorded
consumption of alcohol, but that brought it to just 3%, or only one-fifth of wine’s global share of
recorded alcohol consumption. The same handful of Asian countries are the only ones in which
wine’s share is above the Asian average (Figure 2).
So despite the recent rapid growth in wine consumption in Asia, the potential for further
expansion remains enormous, given the current very low level of per capita consumption and
share of wine in total alcohol purchases. The rapid aging and educating of the populations in
Asia’s emerging economies also lends itself to a continuing expansion of demand for wine there.
Certainly the new Chinese Government’s austerity/anti-corruption drive has been discouraging
4 In 2010, 96% of China’s winegrape area was planted to red varieties (mostly Cabernet Sauvignon), and the country of origin of 97% of the varieties is France (Anderson 2013, pp. 243 and 635).
8
consumption of expensive wines and other luxuries since 2014 but, as suggested below, that
influence is much less on lower-quality wines – which are by far the most voluminous (Table 1).
No Asian country has yet produced grape-based wine for export in noticeable quantities.
As for import dependence, it varied in 2009 from 15% in China (up from 8% in 2000-05) to 68%
in Japan, 96% in Korea, and 100% for all other Asian countries (Anderson and Nelgen 2011,
Table 54). Thus China’s share of Asian wine imports is much less than its share of consumption,
especially when expressed in value terms because the unit value of China’s imports in 2009 was
only half the Asian average. Even so, China together with Hong Kong (which re-exports perhaps
one-fifth of its wine imports to China) dominates Asia’s aggregate wine imports and their growth
(Figure 3).P4F
5P Not surprisingly, therefore, Australia’s exports to those two destinations have grown
exponentially this century (Figure 4).
One needs to be careful not to diminish the role that some other Asian countries play as
significant importers of high-quality wine though. As can be seen in Figure 3, the shares of those
countries in the value of world imports far exceed their volume shares, reflecting the fact that the
average price of their imports is well above that of most other countries. For small producers of
super-premium wines, especially in nearby Australia, they are important and profitable markets.
Needless to say, Asian wine imports would be considerably larger if import tariffs and
excise taxes on wine were less. In numerous Asian countries they exceed those for beer and
spirits on a per-litre-of-alcohol basis (Table 2). The decision by Hong Kong to eliminate its tariff
on wine imports in early 2008 is partly why its imports in Figure 3 are so much higher by the end
than the beginning of the previous decade, and why Australia’s wine exports to Hong Kong grew
so rapidly over the past seven years (Figure 4).
Even without any reforms of those taxes, consumption and imports of wine in Asia are
destined to rise over the years to come. How much they might rise, and how much domestic wine
production might expand to satisfy at least some of that demand increase, is not easy to predict. A
recent study nonetheless has focused on projecting the world’s wine markets over the next few
5 For Google motion charts on the growth of China’s wine imports during 1997 to 2011, see Lewis (2013).
9
years. The next section reports on its findings as they relate to Asia, and how recent policy
changes could impact on Australia’s wine exports.
Projecting the world’s wine markets to 2018
Anderson and Wittwer (2013) have a model of the world’s wine markets in which those markets
are disaggregated into non-premium (including bulk), commercial-premium, and super-premium
wines.P5F
6P Two types of grapes are specified, premium and non-premium. Non-premium wine uses
non-premium grapes exclusively, super-premium wines use premium grapes exclusively, and
commercial-premium wines use both types of grapes. The model divides the world into 44
individual nations and 7 composite regions.
The model’s database is calibrated initially to 2009, based on the comprehensive volume
and value data and trade and excise tax data provided in Anderson and Nelgen (2011, Sections V,
VI and VII). It is projected forward in two steps. The first step involves using actual aggregate
national consumption and population growth between 2009 and 2011, together with changes in
real exchange rates (RERs). The second step assumes aggregate national consumption and
population grow from 2011 to 2018 at the rates shown in Appendix Table 1, and that RERs over
that period either (a) remain at their 2011 levels or (b) return half-way to their 2009 rates (except
for China, whose RER is assumed to continue to slightly appreciate, by 2 percent per year
between 2011 and 2018). In each of those steps, a number of additional baseline assumptions are
made regarding preferences, technologies, and capital stocks.
Concerning preferences, there is assumed to be a considerable swing towards
consumption of all wine types in China, as more Chinese earn middle-class incomes. Since
aggregate wine consumption is projected by the major commodity forecasters to rise by 70
percent rise over that 7-year period, the increase in China’s consumption is calibrated to that in
the more-likely scenario in which exchange rates revert half-way back from 2011 to 2009 rates.
That implies a rise in per capita consumption from 1.0 to 1.6 litres per year. This may be too
6 Commercial-premium still wines are defined by Anderson and Nelgen (2011) to be those between US$2.50 and $7.50 per litre pre-tax at a country’s border or wholesale, with those below $2.50 called non-premium and those above $7.50 called super-premium. Sparkling wines are treated as an additional category, but trditionally they have been of very minor importance to Australia’s wine exports.
10
conservative. Per capita wine consumption grew faster than that in several West European wine-
importing countries in recent decades, and Vinexpo claims China’s consumption was already 1.4
litres by 2012. True, annual per capita wine consumption in Hong Kong is only 3 litres, and
Japan’s is rarely above 2 litres; but with the number of middle class in China currently around
250 million and growing at 10 million per year (Kharas 2010; Barton, Chen and Jin 2013), and
with grape-based wine still accounting for less than 4 percent of alcohol consumption by China’s
1.1 billion adults, it is not unreasonable to expect large increases in volumes of wine demanded.
However, if China’s income growth were to grow slower than the rate assumed in the base case,
and if that meant China’s RER did not continue to appreciate slightly, wine import growth would
be slower. As for the rest of the world, the long trend preference swing away from non-premium
wines is assumed to continue.
Both grape and wine industry total factor productivity is assumed to grow at 1 percent per
year everywhere, while grape and wine industry capital is assumed to grow net of depreciation at
1.5 percent per year in China but zero elsewhere. This means that China’s production rises by
about one-sixth, one-quarter and one-third for non-premium, commercial-premium and super-
premium wines between 2011 and 2018 – which in aggregate is less than half that needed to keep
up with the modeled baseline growth in China’s consumption. Of course if China’s wine
production from domestic winegrapes were to grow faster than the rate assumed in the base
scenario, wine imports would increase less.
Given the uncertainty associated with several dimensions of developments in China’s
wine markets, the more likely of the two main scenarios to 2018 (in which RERs for all but
China revert half-way back from 2011 to 2009 rates, called Alternative 1) is compared with a
third scenario (called Alternative 2) in which three dimensions are altered: China’s aggregate
expenditure growth during 2011-18 is reduced by one-quarter (from 7.8 to 5.6 percent per year),
its RER does not change from 2011 instead of appreciating at 2 percent per year over that period,
and its grape and wine industry capital is assumed to grow at 3 instead of 1.5 percent per year.
Each of those three changes ensures a smaller increase in China’s wine imports by 2018 in this
Alternative 2 scenario. However, this should be considered a lower-bound import projection
because, even if China’s growth in GDP, industrialization and infrastructure spending were to
slow down more than assumed in the Base and Alternative 1 scenarios, Chinese households
nonetheless are being encouraged to lower their extraordinarily high savings rates and consume
11
more of their income. In addition, grape wine is encouraged as an alternative to the dominant
alcoholic beverages of (barley-based) beer and (rice-based) spirits because of its perceived health
benefits and because it does not undermine food security by diminishing foodgrain supplies.
This global model has supply and demand equations and hence quantities and prices for
each of the grape and wine products and for a single composite of all other products in each
country. Grapes are assumed to be not traded internationally, but other products are both exported
and imported. Each market is assumed to have cleared before any shock, and to find a new
market-clearing outcome following any exogenously introduced shock. All prices are expressed
in real (2009) terms.
To project global wine markets forward, it is assumed that aggregate national
consumption and population grow from 2011 to 2018 at the rates shown in Appendix Table 1 and
that preferences, technologies, and capital stocks continue to change as described above, plus that
RERs over that period either remain at their 2011 levels (the Base Scenario) or return half-way to
their 2009 rates (except for China). The latter RER changes began to happen in mid-2013 and had
been achieved by mid-2015, so the Alternative 1 scenario is more likely to be representative of
the real world by 2018 than the Base Scenario. The third scenario (Alternative 2) presents a
lower-bound projection of what might happen to Chinese wine import demand if China’s
economy slows by one-quarter, its RER ceases to appreciate, and simultaneously its domestic
grape and wine production capital grows twice as fast. In all three of these scenarios in this
section of the paper, new FTAs and China’s austerity drive are ignored, but are considered in the
following section.
Table 3(a) suggests China’s production of grapes and wine would grow at similar rates in
the first two scenarios: by one-sixth for non-premium wine and a bit over one-quarter for
premium wines. In the third scenario those rises increase to one-quarter for non-premium wine
and to more than one-third for premium wines.
The income, population and preference changes together mean that Asian consumption
volumes grow dramatically over the period to 2018 except in Japan where the increase is
confined to super-premium wine (Table 4). For China the increase is around two-thirds in the
first two scenarios and a little less than one-half in the third (slower growth) scenario, whereas for
other emerging Asian countries they increase only one-seventh or one-sixth. Given the vast
differences between Asian countries in their 2011 consumption levels though, China dominates
12
the volume growth globally while Western Europe sees a decline in its consumption which
dampens somewhat global consumption growth (Figure 5). The fall in Europe is mainly due to
the hefty weight in its consumption of the declining non-premium wine sub-sector – continuing
the trend in that region of the past three decades.
When combined with the changes projected in production, it is possible to get a picture of
what is projected to happen to wine trade. Table 5 provides projections for the main wine-trading
regions. In terms of volumes, world trade expands 6% by 2018 in the base scenario, and 7% in
the Alternative 1 scenario in which RERs change. Virtually all of that increase in those two
scenarios is due to China’s import growth. In the Alternative 2 scenario, in which China imports
less, global trade also expands less (by only 4%). In terms of the real value of global trade,
however, the upgrading of demand elsewhere means that China accounts for smaller fractions of
the growth in the global import value, namely 36%, 43%, and 30% in the Base, Alternative 1 and
Alternative 2 scenarios, respectively. In all three scenarios China dominates Asian import growth,
and the value of global wine trade rises by about one-sixth (last row of Table 5).
It is not surprising that China is such a dominant force in these projections, given the
dramatic growth in its wine consumption over the past dozen years (Figure 1), the expectation of
continued high growth in its income over the next five years (albeit somewhat slower than in the
past five years), and the assumption that China’s winegrape production growth cannot keep pace
with domestic demand growth. As a result, China’s share of consumption supplied domestically
falls from its 2009 level of 85% to 57%, 54% and 67% in 2018 in the Base, Alternative 1 and
Alternative 2 scenarios for 2018, respectively.
France is projected to remain dominant in imports by China, but in the more-likely
Alternative 1 scenario with a part-reversal of recent exchange rate movements, the increase in
China’s imports from Australia is slightly greater than that from France in value terms and each
of the other exporters’ shares are less than one-third those of Australia and France in value terms
(Figure 6).
Projected bilateral trade changes for Australia and Chile are summarized in Table 6 for
the most-likely Alternative 1 scenario. They benefit greatly from China's burgeoning demands. In
volume terms that is slightly at the expense of growth in their exports to other regions, although
not in value terms because of the modeled upgrading of quality in those other markets. Projected
growth in real export values in local currency terms is even larger than in the US$ terms shown in
13
Table 6 due to the modeled real depreciation of the currencies of those two countries. For
example, Australia's export value growth of US$987 million converts to an Australian dollar
increase of AUD1440 million. Australia’s projected volume growth in this scenario is an extra
21ML of wine per year being exported to China during 2011 to 2018. That should be
manageable, as it is the same rate of increase in Australia’s sales to the United States during the
first decade of this century.
Impacts on projections of recent policy developments: China’s FTAs and austerity
The above results have not taken into account the signing of bilateral free-trade agreements
(FTAs) with China, nor the austerity/anti-corruption drive that began in 2013 and has impacted
heavily on official banqueting and expensive gift-giving.
The pertinent FTAs involve the gradual lowering of tariffs on China’s wine imports from
wine-exporting countries. The general tariffs in 2008 were 14% on sparkling and still bottled
wine and 20% on bulk wine. They have since been phased down to zero by 2012 for New
Zealand and will be zero by 2016 for Chile. They will also be zero for Australia by 2016 for
bottled wine and by 2018 for bulk wine.
To model the impact of those FTAs, we do so in two steps, starting with the Alternative 1
scenario from the previous section. In the first step we send to zero by 2018 the China tariffs on
wine from Chile and New Zealand, they being the earlier FTAs (signed in 2006 and 2008,
respectively). In the second step we then also phase out tariffs on China’s wine imports from
Australia, it being the most-recent country to sign a bilateral FTA with China (in 2015).
Tables 3(b) and 7 reveal that these FTAs will have almost no discernible impacts on grape
and wine production or on wine consumption in China, especially compared with the changes
between 2011 and 2018 expected from the Alternative 1 projections shown in the first column of
those tables.
The FTAs’ impacts on international trade in wine are somewhat more significant, but still
not large. Table 8(b) suggests that Chile and New Zealand have been gaining market share in
China (especially in volume terms for Chile), partly at Australia’s expense; but with the signing
14
of the Australia-China FTA those trade gains for Chile and New Zealand are to be somewhat
reduced while Australia’s export gain will more than offset the reduction it otherwise would have
suffered from those two earlier-signed FTAs. From China’s viewpoint it benefits more in volume
than value of wine imports from the earlier two FTA’s, in contrast to adding the FTA with
Australia which boosts value much more than volume of its wine imports.
The impact of the three FTAs on bilateral trade patterns is summarized in Table 9.
China’s imports from its new FTA partners in the Southern Hemisphere will grow at the expense
of its imports from the United States and Europe, and those FTA partners’ wine exports to
countries other than China will shrink – although by less than the increase in their exports to
China. That is, global trade creation outweighs trade diversion from these FTAs in the case of
wine, according to these results, as also confirmed in the bottom rows of Tables 8(a) and 8(b).
The other policy development of significance to wine is China’s austerity drive. That is
simulated with a leftward shift in China’s domestic demand for super-premium wines sufficient
to reduce the projected expansion during 2011-18 in those quality wines by 9.2% (see Table 7).
That has very little impact on China’s grape and wine production (last column of Table 3), and
only a minor influence on the overall volume of wine imports by China. However, the austerity
drive’s impact on the value of China’s wine imports and of France and Australia’s wine exports
to China is non-trivial, because the drive is depressing the prices of super-premium wines. As a
result, the estimated value of China’s imports will be $80 million less in 2018, with Australia and
France bearing most of that fall: their exports are lower by about 2%, or $19 million and $46
million, respectively (Table 10).
Summary and implications
China has already become by far the most important wine-consuming country in Asia, and the
above projections point to the enormous speed with which China may become an even more
dominant market for wine exporters, with a projected extra 620-940 ML to be added by 2018 to
its consumption of 1630 ML in 2011. Since China’s domestic production is projected to increase
by ‘only’ about 210-290 ML by 2018, its net imports are projected to rise by between 330 and
15
740 ML – or 50ML more once the full impact of the three FTAs with Southern Hemisphere
countries are felt. Certainly the recent austerity drive is going to dampen the growth in super-
premium and iconic wine sales in China, but because those quality wines are still only a small
share of the total sales volume the drive’s impact on China’s aggregate wine consumption and
imports is very minor.
While the recent and projected rates of increase in per capita wine consumption in China
are no faster than what occurred in several northwestern European countries in earlier decades, it
is the sheer size of China’s adult population of 1.1 billion – and the fact that grape wine still
accounts for less than 4 percent of Chinese alcohol consumption – that makes this import growth
opportunity unprecedented. It would be somewhat less if China’s own winegrape production
increases faster, as in the Alternative 2 scenario above, but certainly in as short a period as the
next five years that is unlikely to be able to reduce the growth in China’s wine imports very
much, especially at the super-premium end of the spectrum and notwithstanding that country’s
recent austerity drive.
Of course these projections are not predictions. Where exchange rates move, and how fast
various countries’ wine producers take advantage of the projected market growth opportunities in
Asia, will be key determinants of the actual changes in market shares over the coming years. Not
all segments of the industry are projected to benefit, with non-premium producers in Australia
and elsewhere facing falling prices if demand for their product continues to dwindle as projected
above. But Australia’s exporting firms willing to invest sufficiently in building relationships with
their Chinese importer/distributor – or in grapegrowing or winemaking as joint venturers within
China – may well enjoy long-term benefits from such investments, and more so because of
ChAFTA.
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Figure 1: Per capitaP
aP and total consumption of grape wine in Asia, 2000 to 2014
(a) Per capita consumption (litres)
(b) Total wine consumption (ML)
P
aP All other Asian countries consume less than 0.2 litres per capita per year
Source: Updated from Anderson and Nelgen (2011) using Euromonitor International
0.000.501.001.502.002.503.003.504.00
20002012
19
Figure 2: Wine’s share of total alcohol consumption in Asia,P
aP 2000 and 2009
(percent)
P
aP For all other Asian countries wine’s share of alcohol consumption is less than 3%
Source: Anderson and Nelgen (2011)
0
2
4
6
8
10
12
14
16
2000
2009
20
Figure 3: Shares in the volume and value of global wine imports, developing Asia, 2009
(%)
P
aP Japan’s volume (value) shares are 5.8% (5.3%) in 2000 and 3.9% (2.1%) in 2009
Source: Anderson and Nelgen (2011)
0.0
0.5
1.0
1.5
2.0
2.5Volume 2000
Volume 2009
Value 2000
Value 2009
21
Figure 4: Value of Australia’s wine exports to China and Hong Kong, 2001 to 2015
(AUD million)
Source: Wine Australia (see its Winefacts website at www.agwa.net.au)
22
Figure 5: Projected changes in consumption of all wines, 2011-2018P
a
(ML)
P
aP ‘Base’ refers to the simulation assuming there are no changes in real exchange rates between 2011 and
2018; ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for China’s which appreciates 2%pa; and ‘Alt. 2’ assumes China’s RER does not change from 2011, and its aggregate expenditure grows one-quarter less while its grape and wine capital grow twice as fast as in ‘Alt. 1’.
Source: Anderson and Wittwer (2013)
-600
-400
-200
0
200
400
600
800
1000
1200
Base
ALT 1
ALT 2
23
Figure 6: Shares of China’s wine import value, by source, 2009 and projected 2018P
a
(percent)
P
aP ‘Base 2018’ refers to the simulation assuming there are no changes in real exchange rates between 2011
and 2018; ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for China’s which appreciates 2%pa; and ‘Alt. 2’ assumes China’s RER does not change from 2011, and its aggregate expenditure grows one-quarter less while its grape and wine capital grow twice as fast as in ‘Alt. 1’.
Source: Anderson and Wittwer (2013)
05
1015202530354045
20092018
24
Table 1: China’s wine production, consumption and trade, by quality categories, 2009 (ML)
Production Imports Consumption Self-sufficiency
(%) Non-premium 600 80 680 88 Commercial premium 344 86 430 80 Super premium 18 7 25 72 TOTAL 962 173 1135 85
Source: Anderson and Nelgen (2011, Section VI).
25
Table 2: Ad valorem consumer tax equivalentP
aP of excise plus import taxes on alcoholic beverages, 2008P
(%)
Non-premium wine
(A$2.50/litre)
Commercial premium wine (A$7.50/litre)
Super premium wine
(A$20/litre) Beer
(A$2 /litre) Spirits
(A$15 /litre) China 32 25 25 18 21 Japan 32 11 4 0 12 Hong Kong 0 0 0 0 100 India 165 155 152 100 151 Korea 46 46 46 124 114 Philippines 22 12 9 10 35 Taiwan 23 14 12 2 23 Thailand 232 117 81 51 52 Vietnam 88 88 88 96 115
P
aP At the prices shown in the column headings (expressed in Australian dollars), excluding VAT/GST.
Vietnam rates refer to 2012 Source: Anderson (2010), expanded to include China and Vietnam.
26
Table 3: Projected grape and wine output volume changes for China, 2011 to 2018P
a
(%)
(a) Core scenarios to 2018 BASE ALT 1 ALT 2 Non-premium wine 18 17 24 Commercial-premium wine 26 25 35 Super-premium wine 29 29 39 Premium grapes 20 20 31 Non-premium grapes 18 17 27
(b) Policy change scenarios: impacts relative to ALT 1 in 2018
ALT 1
FTAs with NZ and Chile
(% from ALT 1 base)
FTA with Australia
(% from NZ+Chile FTAs scenario)
Austerity scenario
(% from 3 FTAs scenario)
Non-premium wine 17.1 -0.1 -0.1 0.1 Commercial-premium wine 25.1 -0.1 -0.1 0.1 Super-premium wine 28.8 0.0 -0.1 -0.1 Premium grapes 19.9 0.0 -0.1 0.0 Non-premium grapes 17.4 0.0 -0.1 0.0 P
aP ‘Base’ refers to the simulation assuming there are no changes in real exchange rates between 2011 and
2018; ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for China’s which appreciates 2%pa; and ‘Alt. 2’ assumes China’s RER does not change from 2011, and its aggregate expenditure grows one-quarter less while its grape and wine capital grow twice as fast as in ‘Alt. 1’. ‘FTA’ refers to removing the tariffs on China’s wine imports from the country(-ies) mentioned with whom it has signed a bilateral Free Trade Agreement. The ‘Austerity’ simulation assumes China’s demand for super-premium wines expands by one-eleventh less than in the simulation involving the 3 FTAs. Source: Anderson and Wittwer (2015)
Table 4: Projected changes in quantities of wine consumed in Asia, 2011 to 2018
(%)
(a) Base scenario (assuming no RER changes from 2011)
CHINA JAPAN OTHER ASIA
Non-premium wines 29 -14 0 Commercial-premium wines 87 -3 10 Super-premium wines 87 9 27 All wines 62 -1 17
(b) Alternative 1 (assuming RERs return half-way from 2011 to 2009 rates)
CHINA JAPAN OTHER ASIA
Non-premium wines 31 -14 1 Commercial-premium wines 95 -4 9 Super-premium wines 100 9 27 All wines 70 -2 16
(c) Alternative 2 (assuming also slower Chinese import growth)
CHINA JAPAN OTHER ASIA
Non-premium wines 26 -14 -1 Commercial-premium wines 73 -3 10 Super-premium wines 69 9 25 All wines 46 -1 14
Source: Anderson and Wittwer (2013)
Table 5: Projected change in global wine import and export volumes and values, 2011 to 2018P
aP
(a) Imports
Volume (ML) Value (US$m) Base Alt. 1 Alt. 2 Base Alt. 1 Alt. 2 China 627 739 334 1948 2309 1178 Japan -10 -13 -10 262 235 230 Other Asia 30 24 26 615 520 539 United Kingdom -54 -36 -29 98 179 93 North America -23 11 37 961 1106 1015 Other Europe -122 -176 -140 1012 740 552 Other 152 151 141 498 259 318 WORLD 600 700 359 5394 5548 3925
(b) Exports
Volume (ML) Value (US$m) Base Alt. 1 Alt. 2 Base Alt. 1 Alt. 2 Australia 0 92 59 336 987 675 Other New World 78 222 75 469 965 597 Old World 521 387 224 4370 3537 2653 WORLD 600
(6%) 702
(7%) 359
(4%) 5394
(17%) 5602
(17%) 3925
(15%) P
aP ‘Base’ refers to the simulation assuming there are no changes in real exchange rates between 2011 and
2018; ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for China’s which appreciates 2%pa; and ‘Alt. 2’ assumes China’s RER does not change from 2011, and its aggregate expenditure grows one-quarter less while its grape and wine capital grow twice as fast as in ‘Alt. 1’. Source: Anderson and Wittwer (2013)
2
Table 6: Changes in export volumes and values of Australia and Chile in the Alternative 1 scenario, 2011 to 2018P
b
(a) Volumes (ML)
Exporter:
Importer: Australia Chile
United Kingdom -24 -10 United States -15 -9 Canada -3 -3 New Zealand -2 0 Germany -2 -7 Other W. EuropeP
a -9 -18 China 150 194 Japan -1 -2 Other Asia 0 1 Other countries -2 1 WORLD 92 147
(b) Values (US$m)
Exporter: Importer:
Australia Chile
United Kingdom 50 1 United States 114 22 Canada 38 6 New Zealand 9 0 Germany 0 -4 Other W. EuropeP
a 33 -2 China 662 237 Japan 6 4 Other Asia 51 8 Other countries 24 43 WORLD 987 325
P
aP Other W. Europe = Belgium, Denmark, Finland, Ireland, the Netherlands, Sweden and Switzerland
P
bP The ‘Alternative 1’ scenario assumes real exchange rates revert half way back from 2011 to 2009 rates
by 2018 except for China’s which appreciates 2%pa. Source: Anderson and Wittwer (2013)
3
Table 7: Policy-induced wine consumption volume changes for China, 2018P
a
(%)
ALT 1 (% change
from 2011)
FTAs with NZ and Chile
(% from ALT 1 base)
+FTA with Australia
(% from NZ+Chile FTAs scenario)
Austerity scenario
(% from 3 FTAs scenario)
Non-premium wine 31 0.2 0.2 0.0 Commercial-premium wine 95 0.3 0.5 0.0 Super-premium wine 100 0.3 0.9 -9.2 ALL WINES 70 0.3 0.4 -0.2 P
aP ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for
China’s which appreciates 2%pa. ‘FTA’ refers to removing the tariffs on China’s wine imports from the country(-ies) mentioned with whom it has signed a bilateral Free Trade Agreement. The ‘Austerity’ simulation assumes China’s demand for super-premium wines expands by one-eleventh less than in the simulation involving the 3 FTAs. Source: Anderson and Wittwer (2015)
4
Table 8: Policy-induced changes in global wine import and export volumes and values, 2018
(a) Imports
Volume (ML) Value (US$m)
ALT 1 (ML change from 2011)
FTAs with NZ and
Chile (ML from
ALT 1 base)
+FTA with Australia
(ML from NZ+Chile
FTAs scenario)
ALT 1 ($m change from 2011)
FTAs with NZ and
Chile ($m from
ALT 1 base)
+FTA with Australia
($m from NZ+Chile FTAs
scenario) China 739 52 4 2309 34 86 Japan -13 0 0 235 0 0 Other Asia 24 0 0 520 0 1 United Kingdom -36 -1 -2 179 3 7 North America 11 -5 -9 1106 0 0 Other Europe -176 -1 -1 740 4 1 Other 153 0 0 313 0 0 WORLD 702 43 -6 5602 43 104
(b) Exports
Volume (ML) Value (US$m)
ALT 1 (ML change from 2011)
FTAs with NZ and
Chile (ML from
ALT 1 base)
+FTA with Australia
(ML from NZ+Chile
FTAs scenario)
ALT 1 ($m change from 2011)
FTAs with NZ and
Chile ($m from
ALT 1 base)
+FTA with Australia
($m from NZ+Chile FTAs
scenario) Australia 92 -1 10 987 -11 135 Other New World 222 44 -11 965 60 -18 Old World 387 0 -5 3537 -5 -12 WORLD 702 43 -6 5602 43 104
P
aP ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for
China’s which appreciates 2%pa. ‘FTA’ refers to removing the tariffs on China’s wine imports from the country(-ies) mentioned with whom it has signed a bilateral Free Trade Agreement.
Source: Anderson and Wittwer (2015)
5
Table 9: Marginal impact of three FTAs on changes in export volumes and values of wine-exporting countries in the Alternative 1 scenario, 2011 to 2018P
b
(a) Volumes (ML)
Exporter:
Importer: Australia Other
Southern Hemisphere
United States
Western European exporters
United Kingdom -10 -2 1 7 United States -13 -5 0 3 Canada -2 -1 1 2 New Zealand -1 0 0 0 Germany -1 -2 0 1 Other W. EuropeP
a -4 -3 0 5 China 42 54 -6 -30 Japan 0 -1 0 1 Other Asia -1 0 0 1 Other countries -1 -4 1 3 WORLD 9 36 -3 -7
(b) Values (US$m)
Exporter: Importer:
Australia Other Southern
Hemisphere
United States
Western European exporters
United Kingdom -15 -1 2 22 United States -23 -5 0 23 Canada -5 -1 2 6 New Zealand -1 0 0 1 Germany -1 -1 0 3 Other W. EuropeP
a -7 -5 1 13 China 187 76 -23 -104 Japan -2 -1 0 2 Other Asia -7 -2 1 6 Other countries -2 -2 1 11 WORLD 125 58 -16 -17
P
aP Other W. Europe = Belgium, Denmark, Finland, Ireland, the Netherlands, Sweden and Switzerland
P
bP The ‘Alternative 1’ scenario assumes real exchange rates revert half way back from 2011 to 2009 rates
by 2018 except for China’s which appreciates 2%pa. Source: Anderson and Wittwer (2015)
6
Table 10: Impact of China’s austerity drive on global wine import and export volumes and values, 2018P
aP
(a) Imports
Volume (ML) Value (US$m)
ALT 1 (ML change from 2011)
Austerity scenario (ML from
ALT 1 base)
ALT 1 ($m change from 2011)
Austerity scenario
($m from ALT 1 base)
China 739 -3 2309 -80 Other Asia 11 1 755 -6 UK + Other Europe -212 0 919 -3 North America 11 1 1106 2 Other 151 0 313 0 WORLD 702 -1 5602 -87
(b) Exports
Volume (ML) Value (US$m)
ALT 1 (ML change from 2011)
Austerity scenario (ML from
ALT 1 base)
ALT 1 ($m change from 2011)
Austerity scenario
($m from ALT 1 base)
Australia 92 0 987 -19 Other New World 222 0 965 -10 France 185 -1 2657 -46 Other Old World 202 0 880 -12 WORLD 702 -1 5602 -87
P
aP ‘Alt. 1’ assumes real exchange rates revert half way back from 2011 to 2009 rates by 2018 except for
China’s which appreciates 2%pa. The ‘Austerity’ simulation assumes China’s demand for super-premium wines expands by one-eleventh less than in the simulation involving the 3 FTAs. Source: Anderson and Wittwer (2015)
Appendix Table 1: Cumulative consumption and population growth, 2011 to 2018
(percent)
Aggregate
consumption Population Aggregate
consumption Population France 10.0 0.7 Australia 17.8 7.3 Italy 10.0 0.7 NewZealand 15.4 5.9 Portugal 10.0 0.7 Canada 14.2 5.6 Spain 10.0 0.7 United States 15.5 5.2 Austria 10.0 0.7 Argentina 30.0 4.9 Belgium 10.0 0.7 Brazil 27.3 3.8 Denmark 10.0 0.7 Chile 23.4 5.0 Finland 10.0 0.7 Mexico 22.0 4.6 Germany 10.0 0.7 Uruguay 25.6 7.3 Greece 10.0 0.7 Other L. Am 25.6 7.3 Ireland 10.0 0.7 South Africa 23.1 3.0 Netherlands 10.0 0.7 Turkey 31.8 9.1 Sweden 10.0 0.7 North Africa 31.8 9.1 Switzerland 10.0 0.7 Other Africa 55.8 15.1 United Kingdom 10.0 0.7 Middle East 31.8 9.1 Other W. Europe 10.0 0.7 China 69.0 2.7 Bulgaria 23.1 1.9 Hong Kong 23.7 4.7 Croatia 23.1 1.9 India 63.1 7.0 Georgia 23.1 1.9 Japan 7.1 -1.3 Hungary 23.1 1.9 Korea 22.0 0.7 Moldova 23.1 1.9 Malaysia 34.4 8.2 Romania 23.1 1.9 Philippines 34.4 9.8 Russia 20.6 -1.7 Singapore 18.6 5.6 Ukraine 23.1 1.9 Taiwan 34.6 2.3 Other E. Europe 23.1 1.9 Thailand 36.0 2.6 Other Asia 32.2 11.2 Source: Projections from global economy-wide modeling by Anderson and Strutt (2012).
